Meta Platforms (META 0.60%) has been one of the best-performing stocks on the market since the beginning of 2023, gaining more than 300% at one point.
However, that momentum didn't help the social media giant Wednesday night after it reported first-quarter earnings. Meta stock plunged 15% after hours on the update, even though first-quarter results were strong.
Revenue in the first quarter jumped 27% to $36.5 billion, its fastest growth rate in several quarters, and edged out estimates at $36.2 billion. Operating margin improved from 25% to 38% as advertising growth returned and the company benefited from last year's cost cuts. On the bottom line, generally accepted accounting principles (GAAP) earnings per share jumped 114% to $4.71, topping expectations at $4.32.
Other key metrics also testified to the resurgence of the business, as the average price per ad rose 6% and total impressions jumped 20%. Its user base continued to grow as well, with the company reporting a 7% increase in family daily active people.
However, what spoiled an otherwise strong quarter was the company's guidance. Meta called for only modest sequential revenue growth in the second quarter of $36.5 billion to $39 billion, or $37.75 billion at the midpoint, which was below the analyst consensus at $38.29 billion.
Meta didn't give guidance on the bottom line, but the company raised both its expense guidance for the year and its capital expenditure guidance, which also seemed to impact investor sentiment. The company now expects total expenses for the year of $96 billion to $99 billion, up from its previous range of $94 billion to $99 billion, and it forecast $35 billion to $40 billion in capital expenditures versus its earlier forecast of $30 billion to $37 billion.
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Why investors balked at the guidance
Stocks are valued based on future cash flows, so in some ways it makes sense that investors are more concerned with guidance than the strong first-quarter results.
On the surface, the increase in expense guidance is modest, as it just raised the midpoint by $1 billion, but investors may be skeptical about another boondoggle, since the company's metaverse project has torched tens of billions of dollars with seemingly little benefit so far. In the first quarter, the Reality Labs segment, which is focused on the metaverse, brought in just $440 million in revenue and posted an operating loss of $3.8 billion.
Meta said the increase in expense guidance was due to higher infrastructure and legal costs, and that operating losses would continue to increase meaningfully in Reality Labs. As for capital expenditures, it cited increased infrastructure investments to support its AI roadmap.
In addition to the guidance, Meta's valuation has gotten a lot richer as the stock has soared over the last year or so, and the pullback may reflect that reality.
Is this a buying opportunity or a warning sign?
It's not easy to parse Meta's investment, as the spending on Reality Labs and AI represent different things, though the company sees them as connected.
Management seems to have no plan for driving profitability from Reality Labs, and the recent results show that the Quest 3 has been a disappointment. On the other hand, the AI investments seem justified, especially as the generative AI opportunity still seems wide open.
CEO Mark Zuckerberg touted the company's Meta AI assistant and explained how the company was working on turning the chatbot into a more capable agent that can follow more complex assignments and do things like research information or book flights. Given that nearly half of the world's population uses a Meta product every day, the company has the user relationships to leverage as it seeks to build an audience, giving it a competitive advantage.
At the current price, Meta seems likely to be a winner over the long term, as it still dominates social media advertising and has proven it's capable of controlling spending when needed.
However, the stock is likely to be volatile over the coming months as the spending ramp-up is risky. Investors should be prepared for a further pullback, but for long-term investors, the current sell-off looks like a buying opportunity.
